Introduced to Parliament on 5th December 2018 this is another one for your Summer Holiday reading. There are a number of corrections to previous legislative changes (as usual) and a number of apparently small changes (but not small if it affects you). However, the two key changes you are most likely to be interested in are:
1. Ring-fencing of Residential Rental Losses
The Bill gives us an overview of why this law change is proposed. We wonder if the horse has bolted a bit, given that capital growth on houses is starting to fall, and capital gains tax (CGT) is almost certainly on the way in. Still no doubt a “belt and braces” view is being pursued here. Also, this law change will come in at least a year before any CGT starts to apply, and even then, any CGT will take a number of years to fully capture gains.
The Bill proposes to ring-fence your tax deductions if the expenses from holding your rental property is more than the income from the rental property.
The rule would apply on a portfolio basis (by default) – meaning that investors would calculate their overall profit or loss across their residential portfolio. However, taxpayers would be able to elect to apply the rules on a property-by-property basis. THIS ELECTION WILL BE IMPORTANT AS IT AFFECTS HOW YOU MAY BE TREATED FURTHER DOWN THE LINE – keep reading.
This new rule (let’s not call it a new tax as technically it isn’t) will apply from the start of the 2019/2020 tax year (for most people this is 1 April 2019 onwards), and only to “Residential property” (the Bright-line definitions will apply). What’s excluded you ask?
- your main home
- property subject to mixed use asset rules
- business property and farmland
- properties held in widely held companies
- properties held for employee/worker accommodation (in special circumstances).
- property identified and advised by the taxpayer to the Inland Revenue as being held on revenue account (i.e. any capital gain will be subject to income tax on sale)
Slightly different rules on whether the property is claimed on a portfolio basis or property-by-property for this last one.
When do you get that deferred deduction?
Well sometimes never. But for the rest of the time it will be in a later year, where you have positive net residential rental income, or against income on the sale of residential land. This last part means if you are subject to income tax on the gain when selling the property (aka a tax on your capital gain) you can access the deferred deduction at that time. Access to the deduction where there is a taxable sale will depend on your original election on a portfolio basis or property-by-property basis – and this is where it starts to get tricky.
The Bill also proposes to allow the transfer of ring-fenced deductions between companies in the same wholly-owned group, but these deductions would remain ring-fenced.
Of course, there will be anti-avoidance rules, which will include interposed entities and “land-rich” entities (50% or more of assets are in residential property).
2. GST and imported goods
This is the other biggy in the Bill. This so-called “Amazon Tax” has been well signalled by the Government, and is a welcome attempt to level the retail playing field in New Zealand by imposing New Zealand GST on imported goods. These rules are also being introduced in other countries so we are in step with them (well maybe a bit behind Australia).
The Overseas Vendor (or electronic market place) will be required to collect and pay GST to the Inland Revenue on goods sold into New Zealand with a value of up to NZ$1,000, unless the purchaser is GST registered.
Where goods are more than NZ$1,000 the purchaser will pay the GST at the border, or the vendor can elect to charge it and pass onto the Inland Revenue.
The Overseas Vendor will not have to collect this GST if their total New Zealand sales for a 12 month period does not exceed NZ$60,000. This is the same amount as domestic vendors registration obligations.
Where the goods are delivered to an overseas address and a “Re-deliverer” actually brings the goods into New Zealand, it will be the Re-deliverer’s obligation to meet the GST rules (not the Vendor). In this case, it will be the Re-deliverer’s total value of New Zealand goods that will be counted within the $60,000 threshold.
The assumption will be that the New Zealand purchaser is NOT registered for GST (so GST is charged), unless they advise the Vendor otherwise. The tricky thing will be where a GST registered person has failed to notify their GST registration status and as a consequence is GST charged. They will only be able to claim the GST back for goods up to the value of $1,000 if they can get a “tax invoice” from the Vendor. Good luck with that one.
Anti-avoidance rules? – Of course! And “knowledge” offences can also apply where the purchaser provides false or misleading information as to their GST status or the use of the goods (e.g. not being for their taxable activity).
A reminder that this is in Bill form and may be changed in the Parliamentary process.
You can find the full Bill here.